Canadian Dollar to Prosper From Rising Oil

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Last Thursday, I was watching my screens when I saw an amazing thing. Oil rocketed up 12 percent on the day at one point. Even though it finished the day up 9 percent, I believe this sent a message that many failed to see.

I can't tell you the last time that I've seen oil rise 12 percent at any time on any day. There was likely a ton of short covering that happened that day as new buyers started to creep back into oil.

This doesn't mean that this is the absolute bottom, don't get me wrong. But I do believe this kicked off the recovery process.

Here's why I think that oil could turn up in 2009 when it's done nothing but head down and shed over $100 a barrel recently.

Aside from the unusual buying activity on Thursday, there's a "supply side" dynamic that is about to kick in.

Oil only goes up because either the supply is not available or the demand outpaces the supply. Lately, the demand has withered away quite significantly. However, if you can slow down the supply to get it just under the demand, then prices stabilize and actually reverse and head higher over time.

OPEC pumps about 42 percent of the world's oil. They will meet on Dec. 17 to discuss cutting the supply of oil quite significantly, possibly to the tune of 1.5 million to 2 million barrels per day. That adds up quite quickly.

If they do this, that will be the biggest supply cut in a decade. Even the thought of a supply cut caused oil to rebound to $47.49 from $40.50 a barrel in electronic trading on Sunday night. This bump up has happened in just about four days.

The decline in oil usage is the first since 1983. OPEC wants to halt the slide of oil because it needs a higher oil price in order to meet the member countries' budgets and also to finance the opening up of new oil fields.

The United Arab Emirates, Kuwait, and Qatar, for example, need $55 oil in order to meet their budgets.

The previous five years were awesome to the oil exporting nations. They quadrupled their income in that time. However, this past year has been brutal because of the slide in prices.

Since OPEC controls the supply of oil, I believe it will better serve its better interests and to the price of oil back between $75 to $100 a barrel in 2009 and 2010.

Canada is a major exporter of oil. In fact, many Americans mistakenly think that we get most of our oil from somewhere in the Middle East like Saudi Arabia. But this isn't true. We get more of our oil from Canada than any other country in the world.

If Canada pumps oil for a fixed cost and is able to be priced in the market for more, their profit margins widen. If some of your major export profits widen, then things are going to be good economically for your country. If your country improves economically, then your currency will benefit.

There have already been some indications the Canadian economy is in the position to prosper. Just three days ago, it cut interest rates to a 50-year low. This will make money cheaper to borrow and help businesses expand.

We're also starting to see some pick up in Canada's exports starting in October. Exports rose 2.5 percent that month. It was the first gain the country has had in exports in three months.

The United States went into its recession before most other countries of the world, and they will likely come out of recession sooner than most, too. The United States already has been in a recession for one year. Since most recessions typically last between eight to 12 months, we're probably only a few months away from being out of the woods.

If that's the case, then Canada will prosper as the United States recovers since three-quarters of Canada's exports go to the United States. When this happens, the Canadian dollar will turn around.

In my opinion, this process has already begun and is in the beginning stages, in anticipation of the turnaround in the United states and a bounce-back in oil.

The savviest of investors are starting to creep back into foreign currencies and oil as they feel the worst is behind us and, with longer time horizons, they will come out on top by betting on a recovery at this point.

They believe there is more upside potential vs. downside potential from this point. I'd have to say that I'm now in that camp as well. I've been buying up oil and the Canadian dollar lately, in anticipation of the coming U.S. economic recovery.

If you wait until the recovery is fully at hand, the prices of everything will already be run up. So, you've got to start gobbling up value while it still can be had. Because once it becomes obvious, everyone will be buying these up and all of the "value" will be gone out of them. You would be taking on higher risk at that point because you had to buy in at higher prices.

So, position yourself now for the coming bull market in oil and in the Canadian dollar. I know you always look like the fool at first, but look at these positions one to two years from now and then ask who was the fool? I think you will find that it will be those who didn't start easing into these positions early.

BQI is a tough one. Soooooo risky. Could pay HUGE if it hits, but you just wonder will they be able to cross the goal line and get that oil pumping and sold onto the market before they run out of cash or options to raise cash? SU and CNQ are both excellent plays for the long term imo.

BQI makes money selling off to other companies that develop. Going to be hard going forward. I like the Canroys better than the oil sands. Their dividends are denominated in canadian dollars. A weaker dollar combined with higher oil prices is a powerful combination. With the 2011 tax change they will be converting to MLPs and regular corporations, but should still be good investments.

When the US government begins its massive spending plan, with minimal tax increases, then the value of the US Dollar will fall relative to other asset classes including commodities, real estate, equities and currencies (especially the Canadian and Australian currencies). Countries with commodity heavy markets saw their currency fall relative to the US Dollar. The correlation between oil prices and the Canadian Dollar is probably due to this larger relationship. I agree, when oil prices go up so will the Canadian Dollar.